General Electric Co. yesterday announced a series of initiatives to make its board of directors smaller, busier, more powerful and independent from management, going beyond the corporate governance measures required by accounting reform legislation.
Jeffrey R. Immelt, chairman and chief executive of GE, said he did not want to "wait for 'formal' effective dates in the law which may be many months in the future" to implement these changes, which will go into effect Jan. 1.
Two directors who did not meet GE's new test of what constitutes an independent director will resign in December. The departures of Scott G. McNealy, chief executive of Sun Microsystems Inc., and Paolo Fresco, chief executive of Fiat SpA, bring the total number of directors down to 17. Eleven are classified as independent. Immelt said the company hopes to eventually reduce the size of the board to 15.
General Electric, which has the second-largest market capitalization in the world, is not the first major company to announce corporate governance initiatives, but it is likely to set an example for other companies deciding how to put in place the provisions of the Sarbanes-Oxley corporate governance legislation enacted this year.
That legislation, for example, requires members of audit committees to be independent but does not define what that means. GE released its own standard. If directors are executive officers of another company, that company cannot make sales to, or purchases from, GE that total more than 1 percent of that company's annual revenue.
John J. "Jack" Brennan, chairman and CEO of Vanguard Group, one of GE's top five shareholders, said he thought the test was very fair.
"When you're as big as GE, your challenge on the independence side is very substantial," Brennan said
Although not required to do so, GE is also applying the independence test to members of the compensation committee, which approves executive pay packages, and the nominating and corporate governance committees.
GE is also requiring that members of all three committees only receive compensation from the company for their work as directors. The Sarbanes-Oxley legislation imposes that extra safeguard on audit committee members only.
The company also said the chair of its compensation committee -- now Andrew C. Sigler, a former CEO of Champion International Corp. -- will also serve as presiding director and oversee at least three meetings a year of non-employee directors that will be closed to management.
Charles M. Elson, director of the Center for Corporate Governance at the University of Delaware, said he was pleased with the new guidelines but that "GE has been a bit of a laggard."
The company also drastically increased the authority and workload of the audit committee, which is charged with monitoring the accuracy of a company's books. The audit committee will now review all public financial disclosures, including presentations to analysts and debt-rating agencies, and approve the selection of the internal auditor as well as the outside auditor. Also, the panel will meet with the auditors quarterly without senior management.
GE is also replacing stock options paid to directors with deferred stock units. Directors will be barred from cashing in these securities until one year after their retirement.
Ben W. Heineman Jr., GE's general counsel, said the company preferred these instruments since they mimic the company's stock price and therefore can be more easily valued than stock options in disclosures to investors.